Until recently, billionaire investors seemed to have little or no interest in buying Bitcoin (CRYPTO: BTC). But that looks set to change in 2024. Half of the top 20 billionaire hedge fund managers now own Bitcoin. And in some cases, they’re selling Nvidia to buy this popular cryptocurrency for their portfolios.
There are, of course, a number of factors at work here. You don’t just sell an ultra-high-performing stock like Nvidia without a good reason. Let’s take a closer look at why billionaires are moving into Bitcoin.
Bitcoin ETFs
The real tipping point for Bitcoin ownership appears to have been the launch of the new spot Bitcoin ETFs in January. Suddenly, billionaire investors had an easy, convenient way to invest in Bitcoin without having to enter the crypto market directly. Based on the latest 13F filings with the SEC, it’s possible to see just how much money has flowed into Bitcoin over the past eight months, and frankly, the numbers are staggering.
According to the latest figures from CoinShares, almost $20 billion has flowed into Bitcoin since the beginning of the year. That’s far more than the figure for any other cryptocurrency, and you can thank the new Bitcoin ETFs for that. In fact, hedge funds have emerged as some of the biggest buyers of these ETFs.
As billionaires buy up Bitcoin, they are simultaneously shedding some of their Nvidia holdings. Earlier this summer, for example, two prominent billionaire hedge fund managers — David Shaw of DE Shaw and Steven Cohen of Point72 Asset Management — sold Nvidia shares and reallocated that money to the iShares Bitcoin Confidence (NASDAQ: IBIT)which has become the most popular of the new spot Bitcoin ETFs.
Bitcoin’s Upside Potential
It’s certainly understandable why so much money has flowed into Bitcoin this year. The digital asset is up 40% so far this year, hitting a new all-time high of $73,750 in March.
That’s impressive, but Nvidia is up an even more impressive 132% this year. And when you zoom out and look at Nvidia’s performance over the past two years, it’s staggering. If ever a stock has truly gone parabolic, it’s Nvidia.
Billionaires are supposed to be the “smart money,” so why would they sell an asset that has gone parabolic and put that money toward something else? It may sound obvious, but it has to do with Bitcoin’s upside potential.
You could argue that Bitcoin has an even higher upside than Nvidia over the next two decades. In fact, Michael Saylor of MicroStrategy has suggested that Bitcoin could eventually be worth as much as $49 million per coin by 2045. That represents a potential return on investment of almost 83,000%!
Bitcoin as a Standalone Asset Class
Another factor in Bitcoin’s favor is the growing realization on Wall Street that cryptocurrency is an asset class in its own right, with its own unique risk-return profile. That’s hugely important from a portfolio diversification perspective. So just as a savvy billionaire investor might allocate a certain percentage of a portfolio to traditional asset classes (like stocks or bonds), there’s now a perceived need to allocate at least a small portion of that portfolio to crypto as well.
The big question, of course, is how big that allocation will be. For now, it seems that most billionaire hedge fund investors are choosing to allocate somewhere between 0.2% and 1% of their portfolios to Bitcoin. So it’s not like they’re rushing into crypto just yet.
But 1% of a $100 million portfolio is $1 million, so there’s serious money at stake. And that 1% allocation will undoubtedly become much larger over time. For example, Cathie Wood of Ark Invest suggests that the optimal portfolio allocation to Bitcoin might be 19.4%.
Bitcoin’s Risk-Adjusted Performance
Both Bitcoin and Nvidia are high-risk, high-potential investment opportunities. Instead of focusing on absolute returns alone, it would be better to focus on risk-adjusted returns.
The most popular way to measure risk-adjusted returns is through the Sharpe Ratio, which takes into account the volatility of the assets being tracked. In general, the higher the Sharpe Ratio, the more attractive the investment.
And that’s what makes Bitcoin so special as an investment. Over the past decade, Bitcoin has a higher Sharpe Ratio than any other asset class, including tech stocks. In layman’s terms, Bitcoin is incredibly risky and volatile, but boy, do you get paid for taking all that extra risk!
Bitcoin for the long term
Billionaire investors consider more than just past performance. They think about the upside potential, the overall diversification of their portfolio, and the total amount of risk in their portfolio. And that’s what makes Bitcoin so attractive as a long-term investment opportunity. It may be risky and speculative, but it has the potential to deliver unparalleled long-term performance.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Nvidia. The Motley Fool has a disclosure policy.
Billionaires are selling Nvidia stock, buying up this red-hot cryptocurrency was originally published by The Motley Fool
